Alex Paterson

Opinion: Industrial policy is back — except in Ontario

July 15, 2013
Also featured in Sunday’s Toronto Star. Click here.

 

Industrial policy — government interventions to grow and improve the competitiveness of select industries — is back in fashion, according to a new paper by John M. Curtis and Dan Ciuriak published by the Institute for Research on Public Policy (IRPP).

In fact, industrial policies never really went out of style, except in the Anglo-American democracies. For the past three decades governments in the Anglosphere — regardless of the party in power — have shied away from industrial policies and embraced the notion that state interventions to promote specific economic sectors usually do more harm than good. This is allegedly because governments don’t have the necessary information to “pick winners.” The market, according to this view, is always far superior at allocating resources than any government ever could be.

Under this paradigm, the best thing governments can do to promote investment, industrial development and economic growth is to get the so-called economic fundamentals right and let the market — that supreme and venerable vehicle for the efficient allocation of resources — take care of the rest. In practice, the prescription calls for low taxes on capital and income, balanced budgets, low debt, low and stable inflation and a light regulatory touch. These are the necessary ingredients that will permit the market to work its magic on the economy.

Governments in this country have by and large bought into this mainstream view for over two decades, and have implemented this policy agenda, to varying degrees. Successive governments in Ottawa, for example, have rarely missed an opportunity to brag that Canada has the best economic fundamentals in the G8.

In the context of this conventional wisdom, the industrial policy light has barely flickered in this country.

But now, according to Curtis and Ciuriak, industrial policy is resurging, even in the more skeptical Anglo-American countries. They argue this is due to the global financial crisis/recession, and the slow and uneven economic growth that has followed. Governments are increasingly looking for some way — any way — to get growth back onto a decent trajectory, and in particular to regenerate manufacturing industries that were hit very hard during the recession.

This marks a big shift in attitude. For decades, governments in this country wouldn’t utter the phrase industrial policy for fear of being labelled economically illiterate by the high priests of mainstream economics and their apostles in the business media. Today, however, the competency of the economics profession is in serious question given its role in creating the intellectual foundations for the policies that brought on the global banking crisis of 2008-09 and the worst recession many countries have experienced in 80 years. Not to mention the fact that mainstream economics’ remedies to the crisis have produced scant growth in most countries thus far.

We might now, therefore, be on the cusp of a new economic policy paradigm. As Curtis and Ciuriak claim, it is those countries with robust industrial policies — especially in Asia and other emerging markets — that have seen superior growth performance post-recession. Those are the kind of facts — as opposed to theory — that tend to catch the attention of governments struggling for an economic narrative to put to citizens in a slow-growth and relatively high-unemployment context.

Canada is no exception. The Harper government, on paper the most free market administration in living memory, is adopting a more industrial policy-friendly mindset. There is evidence of this in policies to promote extractive industries, but also with significant new initiatives in the aerospace and defence sectors, both of which are well-known candidates for industrial strategies in almost all advanced countries. The relatively new Federal Economic Development Agency for Ontario is also to a degree an industrial policy instrument.

Curiously, though, the one government in Canada that you would expect to be embracing industrial policy seems lukewarm to it. Ontario has experienced the most alarming economic transformation of any Canadian province in recent years. Its manufacturing sector lost 255,000 jobs over the last decade. The province’s share of Canadian GDP fell from 41 per cent to 37 per cent over that same time period. For three years now, Ontario, traditionally the milch cow of Confederation due to its powerhouse industrial economy, has been officially a “have not” province, receiving billions of dollars in equalization payments from Ottawa annually.

Yet we seem to see more enthusiasm for industrial policy in blue Ottawa than in red Queen’s Park, which still emphasizes deficit reduction as the key to Ontario’s economic prosperity. While the Wynne government is pursing an aggressive transit agenda, it seems less enthusiastic than its predecessor in developing “green” manufacturing to offset some of the decline in the auto industry, and shows little interest in policies aimed at other sectors that offer promising growth opportunities.

Now is probably the time for the Ontario government to embrace the industrial policy paradigm and advance an economic agenda for the province that works in practice but maybe not so well in theory.

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